We Were Stunned By The Brand New Patent That's Been Awarded To Bill Gross

Global bond giant PIMCO, led by bond king Bill Gross, announced
today that the firm was
awarded a patent on a methodology for constructing investable
fixed income indices.

The patent PIMCO just received pertains to the firm's
strategy of weighting the constituent securities of an index by
measures like GDP, as opposed to most indices, which typically
weight securities by market capitalization (a measure derived
from the prices of financial assets).

So, if you invest in a PIMCO index constructed by this
method, you'll be getting more bonds from countries with bigger
economies as opposed to more bonds from countries whose bonds
just happen to currently be valued higher.

The fact that PIMCO was able to get a patent for its strategy
caught us a bit off guard – it doesn't really seem like the type
of thing one would typically seek a patent for.

After all, this a big part of what PIMCO and many other firms do
as investment managers – they construct indices comprised of
various bonds (or other instruments) that give investors access
to a range of securities in a single investment vehicle.

Nonetheless, they justify the patent by the fact that the
methodology is considered intellectual property.

The methodology is designed to capture the ongoing
transformations in global bond markets -- in particular the
shifting economic weight from developed countries to emerging
markets -- by assigning more appropriate portfolio weights rather
than using a backward-looking, market-capitalization weighting
common to most global bond indexes.

The GDP weighting approach is intended to help investors to gain
a first-mover advantage by positioning portfolios in markets that
are underrepresented in traditional indexes. GDP weighting
also helps investors avoid the biases embedded in market
capitalization-weighted indexes that concentrate large weights in
the most highly indebted countries. In addition, GLADI makes
fuller use of the global fixed income opportunity set,
incorporating both nominal and inflation-linked securities.

A few other managers have been active in the patent space for
similar reasons. One is Rob Arnott, who runs Research Affiliates,
a fund with over $170 billion in assets under management.
One of Arnott's patents is for an indexing methodology based
on various accounting metrics.

Research Affiliates sees the patent "as giving us
the opportunity to license our ideas to a lot of folks,"
Rob Arnott, chairman of Research Affiliates says.
Companies licensing Research Affiliates' fundamental
indexes pay annual fees of 0.08% to 0.20%, depending on
the amount of assets and the type of indexes being licensed, Mr.
Arnott says. Firms like Charles
Schwab Corp. and Allianz SE's
Pacific Investment Management Co. offer products based on these
benchmarks.

Laise also received a few choice quotes from another
manager that shed some light on the practice and how it is viewed
in the industry:

Mr. Arnott isn't alone in seeking to patent his indexing
methodology. ETF provider RevenueShares Investor Services also
has applied to patent its approach, which involves reweighting
capitalization-weighted indexes like the S&P 500 by revenues.
The fact that Research Affiliates was able to obtain a
patent "is an encouraging sign," says Sean O'Hara,
RevenueShares' president. "I don't think anybody thought
anybody would get a patent on any of this stuff," he
says. Yet "there's a lot of folks investing a lot of money in
this area and it makes sense to protect your intellectual
property."